Rising Wealth and Its Impact on Muni Bonds

Klotz on Bonds

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<h3>James A. Klotz</h3>

James A. Klotz

Wealth is rising in the United States, could a surge of interest in municipal bonds follow?

IRS data showed adjusted gross income increased by $2.2 trillion, or 17.7%, in the 2021 tax year vs. 2020, according to a report by Western Asset Management Co.

The jump in AGI, which occurred across tax brackets, was the biggest in 20 years. It came as the economy was emerging from the pandemic and the labor market was strengthening.

Higher incomes, healthier issuers

Higher incomes bode well for tax collections, an important gauge of the credit health of issuers, and could fuel the appeal of tax-free bonds.


“From a market technicals perspective, income trends also inform the composition of potential demand for municipal securities,” the report said.

The number of taxpayers with incomes lower than $50,000 in 2021 decreased 4% to 34%, depending on income level, the report noted. At the same time, the number of those earning more than $500,000 increased 32% to 44%.

Of course, the interest income from most munis is exempt from federal income tax and, in most cases, state and local taxes as well, which appeals to taxpayers across the income spectrum. For investors in higher tax brackets, however, the tax exemption is particularly advantageous.

Clouds clearing for some issuers

The report on growing incomes comes amid recent positive news from issuers.

For example, last month Moody’s raised Detroit’s issuer and general obligation unlimited tax bond ratings to Baa2 from Ba1, the first time in 15 years the Motor City achieved investment-grade status.

Last week Moody’s upgraded Paterson, New Jersey’s general obligation bonds to investment grade following years of mismanagement by the city.

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    Earlier this year, S&P boosted the rating for general obligation bonds of another city in New Jersey, Camden, from A minus to A and maintained its stable outlook. It was the city’s third upgrade in 10 years and its rating is now at its highest level in almost 50 years.

    Market insight remains key

    Overall, market signs appear promising. We are encouraged, for example, that the government spending bill was approved. Continuing to fund the government is essential for issuers.

    This environment, along with potential tax hikes and highly attractive muni yields, is driving strong demand.

    While we celebrate a strong market, growing affluence and the improving financial conditions of some issuers, we know that conditions can always change.

    For municipal bond buyers, it means they must fully understand the bonds they’re investing in and have the experience, knowledge and access to the securities that make sense for them.

    Market insight is as essential as it’s always been.

    James A. Klotz is the President of FMSbonds, Inc.
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    Apr 4, 2024

    Please note that all investing entails risk. Fixed income securities are subject to risks that will affect their value prior to maturity. Some of these risks can be related to changes in market conditions, issuer creditworthiness, and interest rates. This commentary is not a recommendation to buy or sell a specific security. All references to tax-free income refer to U.S. federal income tax. Income earned by certain investors may be subject to the Alternative Minimum Tax (AMT), and or taxation by state and local authorities. Please consult with your tax professional prior to investing. For more information on these topics please click on the “Bond Basics” link below or search by keyword at the top of this page.